The wirehouses have tinkered with their compensation plans for 2020, sharing details on comp updates for their advisors over the past few weeks. Shifts in comp grids at Merrill Lynch, Morgan Stanley, UBS and Wells Fargo are closely watched by other firms (as well as recruiters) as they can influence other industry players and advisor movement.
This year, Merrill limited changes, while the other wirehouses plowed ahead with adjustments for the next 12 months. Andy Tasnady, head of compensation consultants Tasnady & Associates, explains the broader picture painted by these changes.
1. Small Households Get the Thumbs Down “Wells Fargo was the last of the four wirehouses to focus on discouraging small accounts,” Tasnady said. This delay may be due in part to the history of Wells Fargo Advisors, which has included the rollup of many regional firms. “These regional players tended to have more smaller accounts and clients [than the wirehouses], as well as somewhat lower revenue per advisor, which “goes hand in hand with smaller accounts,” he explained.
“If their advisors were getting a bit more [revenue] proportionally from small accounts, [it makes sense] they were the last to join the other wirehouses in having a small-household penalty policy,” Tasnady said. “They’re trying to catch up for lost time.”
For next year, he says, WFA is raising the client account minimum from $100,000 to $250,000 and creating a disincentive around these accounts. “Advisors generally get 20% on these accounts; they can earn it back in deferred compensation, if they have a certain mix in their book of business — i.e., one that doesn’t include too many small accounts,” he explained.
Overall, firms like Merrill Lynch have been encouraging advisors to move smaller accounts to its phone-based advisor center. Morgan Stanley just moved to simplify its small-household policy for 2020. As of April, it will use assets and liabilities to determine whether a household is subject to the small-household policy. Also, client accounts that have a qualified financial plan will earn advisors full payout plus one extra percentage point.
Meanwhile, Wells Fargo’s adoption awards aim to limit the portion of small accounts that are part of an advisor’s overall book of business. “It’s been a 20-year effort at the large firms to encourage advisors to move small accounts to phone centers and stop clogging up advisors’ ability to serve larger accounts,” Tasnady said.
“Wells Fargo has had incentives for large accounts for a while and only recently put in the penalty for smaller accounts,” he added. Overall, it is aiming for advisors to incorporate yearly financial plans, lending and estate planning services into its work with clients.
“The focus is on more contact with clients, as the industry shifts to fee-based work rather than the old practices of trading 100 shares of IBM stock,” the consultant explained. “Today, the idea is to call clients … to discuss their progress toward reaching their financial goals, rebalancing and not panicking when the market makes a sudden move.”
Typically, the large brokerage firms have behaviors they emphasize through bonuses, such as shifts to financial planning, growth goals, recurring fee-based business or a certain mix of business. “Wells Fargo has a bonus dedicated to a certain mix,” Tasnady said, “while other firms use an advisors’ mix of business as part of the criteria for other bonuses and/or higher team payouts, for instance.”
2. Simplicity Rules at Wells Fargo Wells Fargo has a core two-tiered comp plan that is “pretty simple” compared with the multi-layered or stair-step grid used by the other wirehouses, according to the compensation consultant. The bank also pays advisors 50% cash for incremental revenues, even at the lower revenue levels. At the other wirehouses, “You’ve got to be a very high producer to get 50% cash on marginal business,” he said.
Plus, Wells Fargo pays advisors a higher portion of compensation in cash versus deferred payments than its rivals.
For instance, if an advisor has $32,500 a month in revenue, about $12,500 is paid out at the 22% cash level and the rest at 50% cash every month; all dollars of revenue above that first hurdle are paid at 50% cash, in other words. “It’s easy to figure it out,” Tasnady said.
(In other words, advisors do not get a 28% payout on the first $150,000 in production for 2020, which works out to them not getting about $42,000 over the full year; they do, though, get paid 22% cash on the first $150,000 — or $33,000 — and then 50% afterwards.)
An advisor producing revenue of $480,000 a year, or $40,000 a month, would see a weighted balance of 22% compensation on the first $12,500 in monthly production and the rest at 50%, he explains.